The collapse of German credit

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THE COLLAPSE OF GERMAN CR]

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The present war has undoubtedly upset the calculations of mo, of the w orld's economic experts
It is, therefore, dangerous to be dogmatic in regard to the significance even of events that are taking
place before our eyes. Still, there remain certain means of judgmjnt on which reliaince can fairly be
placed. In the economic sphere, one of these is agreed to be the rate of Exchange at which the
currency of belligerent countries can be negotiated in neutral centres. One may thus employ this
criterion to the financial position of Germany without riski ng any s us eeone^o blonder.

The criterion of foreign exchange is the one best applied to the credit of a belligerent country
because experience has shown that, internally, the difficulties of war finance can fairly easily be met.
In this respect practically all the belligerent countries have had similar experiences. The outbreak of
war in 1914 gave finance and industry a severe shock everywhere. But me industrial nature of
modern war and the improvement in the machinery of modern fin e have enabled that shock to be
almost forgotten. All the belligerents have been forced to alter tl economic life iii the direction of
concentrating industry upon the one work of producing munitions vvar. This concentration having
been successfully effected, unemployment has been avoided, and with an inflation 'of the currency
varying in the different belligerent countries, internal solvency has been almost everywhere maintained.
Thus it is only in neutral countries that a just estimate of the respective credits of th| belligerents can
be formed. And the best means of making this estimate is to be found in th<t quotations for
belligerents' currency in neutral markets. The country in which the respective credit' of, say, England
and Germany can most fairly be estimated seems to be Holland, which is separated only by a land
frontier from Germany, and by a short sea passage from England. One may then regard the course
of exchange rates on Holland, of London and of Berlin, as showing the market value of British and
German currency expressed in Dutch money.

While during the first fourteen months of the present war German currency had only depreciated
in Holland by 14'7 per cent., between October 1st and December 31st, 1915, this depreciation had
increased to 28*7 per cent. This relatively rapid depreciation in the value of the Rejichsmark during
the last quarter of 1915 is acknowledged by economists to indicate that the militaijy activity of the
Germans in that period was only made possible by a further decrease in productive activity in
Germany which involved a virtual collapse of the remains of the German export trade. In August,
1915, Finance Minister Helferrich stated that the depreciation of the mark abroad was unimportant.
But subsequent actions of the German Government have given that economist tie lie. As from
January 28th, 1916, free dealings in foreign exchange in Germany were forbidden,, and such trans-
actions can now only be arranged through the Reichsbank. Yet, despite the increasing thoroughness
of this governmental control, the depreciation in the mark has gone on apace. Through April and
May, 1916, the quotations of the mark in Amsterdam showed some recovery from the lowest level
previously touched. But in June the decline began again, and continued steadily until November.
At this point there was a period of relative steadiness. But in March, 1917, the jnark resumed its
downward course, and, as a result no doubt of the British victories in the West and die declaration of
war against Germany by the United States, the depreciation in the value of the mark had by the
middle of April, 1917, amounted to 37'6 per cent. This depreciation may be stated in another way,
namely that a German buyer of Dutch goods who would have paid 100 marks for thebi before the war
had (quite apart from any rise which may have taken place in prices generally,) to pay 160 marks for
the same goods in April, 1917. ||

It may be said, however, that a certain amount of depreciation of a belligerent's currency in a
neutral centre is inevitable, and that even British credit has not emerged from the ordeal unscathed.
This seems true, but the chart overleaf shows that British money has depreciated to a very much
smaller extent than that of Germany. It will further be observed that during thtf last year while
British currency recovered by 2 per cent, in Amsterdam, German marks depreciated by a further
8 per cent.

The figures shown on the chart on the reverse page prove clearly enough the strain which will be
put on German finance after the war if the country is to obtain the imports of rat materials from
abroad which will be necessary to restore the activity of German industry. Yet the stock of gold in
the Reichsbank (and gold is the only thing left to Germany that she can expert) is even now
barely sufficient for internal requirements. It amounted on 31st March, 1917, to £l 27,238,000. By
taking into account a holding of £19,135,000 of Treasury notes, the Reichsbank (vfhich is no longer
obliged to pay its notes in gold) was just able to maintain the proportions of one to tBree laid down by
law as against the amount of notes in circulation, which on that date amounted [:o £430,801,000.
With the issue of only £10,000,000 more notes, this legal proportion would have been exceeded. But
this the German Government dare not face, and much less dare it export any of the gold on which it
bases its appeal as a borrower to the German investor.

f-&* 395345 J

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